Economists are reassessing their outlook for Canadian interest rates following the Bank of Canada’s oversupply on Wednesday and tough discussions by the bank’s governor to bring inflation back under control. The central bank announced an increase in interest rates by 50 basis points instead of the usual 25, raising its policy rate to 1 percent. Borrowing costs are still much lower than pre-pandemic levels and the bank said interest rates should continue to rise. A growing number of Bay Street meteorologists now expect the bank to continue its aggressive move this week with another 50 basis point increase at its next meeting in June. Until recently, they predicted that the bank would move more carefully. Most also revised their expectations for higher interest rates over the next two years after the central bank raised its estimate for the so-called “neutral interest rate” (a level that neither stimulates nor sustains the economy) by a quarter of a percentage point. unit Wednesday. The Bank of Canada raised its key interest rate to 1%. Here’s what that means for Canadians Bank of Montreal CEO says rapid interest rate hikes needed to tame inflation as central banks step on a rope As a rule, the Bank of Canada does not specify its expected course of interest rates. However, Governor Tiff Macklem said Wednesday he wants to return to a neutral policy rate between 2 percent and 3 percent relatively quickly. The bank previously estimated that the neutral interest rate ranged between 1.75 percent and 2.75 percent. “If demand responds quickly to higher interest rates and inflationary pressures subside, it may be appropriate to stop tightening as soon as we get closer to the neutral rate and take stock,” McClelman told a news conference after announcing interest rates. “On the other hand, we may need to take interest rates slightly above neutrals for a period of time in order to restore supply and demand to equilibrium and bring inflation back to target,” he said. Analysts said the comments meant the bank intended to raise its policy rate above the pre-epidemic level of 1.75 percent faster than expected. The higher estimate for the neutral interest rate also suggests that the bank could move the policy rate up to 3 percent, which is more than most people expected a week ago. “It looks like policy rates will rise sharply to neutrals and then the pace of tightening is likely to slow,” Benjamin Reitzes, chief executive of the Bank of Montreal’s Canadian interest rate firm, wrote in a note to clients. “So now we’re looking for 50 bp [basis-point] increase in each of the next two sessions, before the BoC shifts to a quarterly rate of 25 bp. “ Analysts also noted Macklem’s commitment to act “as vigorously as needed” to bring inflation back to target. “As a result, we now expect the Bank of Canada to act ‘dynamically’ again by raising interest rates by 50 basis points in June,” Royce Mendes, Desjardins’s chief macroeconomic strategist, wrote in a note to clients. “It’s not a slam dunk, as the central bank outlined some high inflation forecasts for the second quarter that may not apply, but the 50 basis points have become our main case for the June announcement,” he said. While the Bank of Canada seems willing to step up its anti-inflation campaign, rising household debt levels and over-reliance on real estate to drive the economy could limit how far and how fast the bank can move without to cause recession. “We are still skeptical that the bank will be able to restore interest rates to neutral levels, let alone the 3% or higher currently valued in the futures market,” wrote Paul Ashworth, chief economist at North America at Capital Economics. note to customers. “Canada’s economy is also much more dependent on housing investment than any other advanced country,” he said. “The enigma facing the Bank of Canada is that investing in housing is the most cost-effective part of any economy. “Even if housing prices do not fall, squeezing household wealth and burdening consumer spending, we can expect a significant drop in housing investment, especially from such a high starting point.” Your time is precious. Deliver the Top Business Headlines newsletter to your inbox in the morning or evening. Register today.
